New tech, venture capital feed "gold-rush" among India's IT start-ups

MUMBAI, June 12 In India's IT services
outsourcing sector, local start-ups, often backed by U.S.
venture capital funds, are nipping at the heels of industry
heavyweights such as Tata Consultancy Services Ltd and
Infosys Ltd.

These nimble start-ups, most of them based in Bangalore,
offer niche cutting-edge technology products, solutions and
services that traditional outsourcing companies don't offer, or
can't offer at competitive rates.

To be sure, Tata Consultancy (TCS), Infosys and Wipro Ltd
still account for the bulk of the $100 billion-plus
core IT industry's sales and employ hundreds of thousands of
engineers. But as these focus on routine services like
application development and IT infrastructure management, the
start-ups are stealing a march in newer areas such as cloud
computing and mobile technology.

The value of outsourcing contracts for digital technologies
- social, mobility, analytics and cloud (SMAC) - is set to soar
to $287 billion by 2016 from $164 billion last year, says Rajat
Tandon, a senior director at the National Association for
Software and Services Companies, an outsourcing sector lobby
group.

Start-ups will lead the race in providing solutions based on
these SMAC technologies, says the group, which predicts the
number of start-ups in India will top 2,000 by 2015, from 450 in
2012.

"There's a gold rush. Start-ups are rushing in to serve
markets that were never served before," said Sharad Sharma,
co-founder of iSPIRT, a think-tank and start-up consultancy.

HEAD-TO-HEAD

One such relative newcomer is ISGN, a mortgage technology
and services company backed by California-headquartered New
Enterprise Associates and India's KK Birla group. With a modest
workforce of 1,200, the 2007 start-up is already taking business
from its bigger, established rivals, winning outsourcing
contracts from leading U.S. mortgage companies.

ISGN last year won a $75-$100 million renewal order from one
of the top five U.S. mortgage companies which had previously
placed work with one of the major Indian IT firms, said CEO Amit
Kothiyal, a former Infosys veteran. He declined to give details,
citing a confidentiality pact.

"We have a couple of large deals going on right now, where
we're competing head to head with some of the traditional Indian
IT majors," he added.

India's big outsourcing companies have thrived for years by
providing IT and back-office services to global corporations
such as Citigroup and BT Group Plc, tapping a vast
cheap local workforce. But they are now coming under pressure
from smaller firms with venture capital funding, a technological
edge and staffed often by skilled engineers who have quit well
paid jobs at the large IT companies to take on the challenge of
a new venture.

"Today, the deal isn't about labour arbitrage ... to be
competitive, companies need to provide technology, and services
become an add-on to that," said Ben Mathias, a partner at New
Enterprise Associates' India unit. "Without the technology you
lose the competitive edge."

U.S. retailer Target, for example, is working with
five Indian start-ups on areas ranging from automating the
generation of rotating 3D images to the personalisation of
search and product recommendations, said Navneet Kapoor, its
India managing director.

Sudin Apte, CEO and founder of advisory firm Offshore
Insights said the so-called Global 2000 firms - from the Forbes
list of the world's biggest public companies - are expected to
spend 15-16 percent of their IT services and outsourcing budgets
on SMAC, with India forecast to export $16 billion worth of SMAC
software and services in fiscal 2018.

BUSINESS MODEL REVOLUTION

Reuters spoke to five start-ups, four of which said that
more than 60 percent of their revenues came from clients in the
United States and Britain, and there's almost always an
incumbent IT player they have to compete against.

Client demands range from quick project turnaround and
customised marketing solutions to a need for a competitive edge
in using digitisation, mobile, social media and other platforms.

The adoption of digital technology has substantially changed
business models across the financial services, healthcare,
entertainment and telecoms industries, says Sudin Apte, CEO and
founder of advisory firm Offshore Insights.

For example, Mumbai-based Emart Solutions, a loyalty
management company, won a deal with a global energy company by
developing new mobile technology that cut the time needed to
process sales data from several weeks to a few seconds,
co-founder Srikanth Chunduri told Reuters.

In traditional IT services, affordable options like Zoho,
which offers customer relationship management solutions to small
and mid-sized firms, prompted EcoMark, a Denver, Colorado-based
solar energy firm, to migrate from a similar Salesforce.com
platform, the start-up told Reuters. Zoho, based in the
southern Indian city of Chennai, said EcoMark saved more than
$1,000 per month for 30 users by switching to its platform.
EcoMark and Salesforce.com did not respond to requests for
comment.

"One can't ignore that for every account we speak to there's
always an incumbent you have to contend with," said Puneet
Jetli, chief operating officer at Happiest Minds, whose
investors include Canaan Partners and Intel Capital. Jetli says
at least 60 percent of the Bangalore-based start-up's new
projects come from companies which are already working with
established IT groups, but want a change.

FUNDING INNOVATION

Venture capital funding has long been a missing link for
budding tech start-ups in India - from the days when the seven
co-founders of Infosys pooled $250, mostly borrowed from their
spouses, to start the company more than three decades ago.

The country is now seeing a boom in early-stage investment
with a large number of funds, including U.S.-based Accel
Partners, Lightspeed Venture, Charles River and Sequoia Capital,
chasing innovative ideas.

Venture capital funds invested around $190 million in
early-stage tech firms in India last year, up by almost a
quarter from 2012, according to Hong Kong-based Centre for Asia
Private Equity Research Ltd. A total of $623 million has been
invested by venture funds in India since 2011, three-quarters of
which was used to buy stakes in software services and e-commerce
start-ups, data from the research house shows.

"India is undergoing a transformation. The Internet is
catching up and is becoming a basic need here. That makes India
an incipient market for businesses that leverage that," said
Prayank Swaroop, Senior Associate at Accel Partners in India.

The attraction for venture funds was underscored by Facebook
Inc's acquisition in January of Bangalore-based Little
Eye Labs, a start-up that builds performance analysis and
monitoring tools for mobile Android apps. VenturEast
Tenet Fund, an early-stage investor in Little Eye Labs, made a
return of multiple times its initial investment, people in the
industry said. Sateesh Andra, managing partner for VenturEast,
which has close to $300 million under management, said returns
on Little Eye were "attractive", but declined to give details.

"There's a lot of innovation to come and that can only
happen if capital is made available," said Bejul Somaia, India
managing director for Lightspeed, whose investments in India
range from $1 million to $25 million. "It's encouraging to see
that more capital is being made available to fund innovation at
a time when these technology platform shifts are underway and as
more young entrepreneurs take the risk of starting companies."

The established IT companies are taking note, and are open
to partnering with start-ups to reach a wider range of clients,
instead of developing all the facilities themselves.

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